Macroeconomic Uncertainty and Investment – Empirical Analysis.pdfVIP

Macroeconomic Uncertainty and Investment – Empirical Analysis for Romania MACROECONOMIC UNCERTAINTY AND INVESTMENT – EMPIRICAL ANALYSIS 9. FOR ROMANIA1 Corina SÂMAN* Abstract From a theoretical point of view, uncertainty may have an impact on investment by different channels and in different directions. Thus, the sign of its overall effect is unknown and could be found only empirically from the historical data. This paper analyzes the relation between macroeconomic uncertainty and total investment in Romania over the period 2000-2008. As a source of uncertainty, it considers different measures of volatility in prices and exchange rate from autoregressive conditional heteroskedastic (GARCH) models. These measures are introduced as a linear and a quadratic term in the investment equation. The results prove a nonlinear effect of uncertainty on investment. Keywords: investment, uncertainty, irreversibility, economic instability, inflation, exchange rate JEL Classification: E22, C22 Introduction The impact of uncertainty and instability on investment was studied from a theoretical point of view through different channels and under various assumptions on risk aversion, costs to acquisition and other factors (Abel and Eberly, 1999, Pindyck and Solimano, 1993, Caballero, 1991). The conclusions envisage effects in opposite directions depending on the economic assumptions made (such as perfect competition and constant return to scale in Caballero, 1991 or the degree of risk aversion, the convexity of the profit function and the distribution of risk in Zeira, 1990), the source of uncertainty and, also, depending 1 This paper is